Working Paper: NBER ID: w16879
Authors: Ernst R. Berndt; Thomas G. McGuire; Joseph P. Newhouse
Abstract: The pricing of medical products and services in the U.S. is notoriously complex. In health care, supply prices (those received by the manufacturer) are distinct from demand prices (those paid by the patient) due to health insurance. The insurer, in designing the benefit, decides what prices patients pay out-of-pocket for drugs and other products. In this primer we characterize cost and supply conditions in markets for generic and branded drugs, and apply basic tools of microeconomics to describe how an insurer, acting on behalf of its enrollees, would set demand prices for drugs. Importantly, we show how the market structure on the supply side, characterized alternatively by monopoly (unique brands), Bertrand differentiated product markets (therapeutic competition), and competition (generics), influences the insurer's choices about demand prices. This perspective sheds light on the choice of coinsurance versus copayments, the structure of tiered formularies, and developments in the retail market.
Keywords: No keywords provided
JEL Codes: D4; I11; L12; L13; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nature of competition (L13) | pricing strategies employed by insurers (G22) |
| insurer's choice between coinsurance and copayment (G52) | pricing incentives of the monopolist (D42) |
| coinsurance (G52) | higher demand prices compared to no-insurance scenario (G52) |
| copayment (G52) | higher prices without constraints (D41) |
| patent-protected substitutes (D45) | insurers covering only one drug (I13) |
| insurers covering only one drug (I13) | stimulating competition among manufacturers (L11) |
| stimulating competition among manufacturers (L11) | affecting procurement prices (H57) |